Supreme Court Interprets Copyright "First Sale" Doctrine

Introduction
On March 19, 2013, in a 6-3 decision, the Supreme Court issued its opinion in Kirtsaeng v. John Wiley & Sons, Inc.i, holding that the copyright "first sale" doctrine applies to copies of works manufactured outside the United States. The first sale doctrine allows the owner of a lawfully made copy of a work to sell or otherwise dispose of that particular copy without obtaining permission of the copyright owner.ii Under the ruling, any person or company is free to import and sell in the United States lawful, foreign-made copies of copyrighted works (books, music, movies, etc.) or products that contain copyrighted works (for example, embedded software) without having to separately clear the copyright rights. The issue before the Supreme Court was whether the doctrine applies to copies of copyrighted works that were lawfully manufactured and obtained abroad.

Background
The Kirtsaeng decision resolved a long disputed tension between the first sale doctrine and the importation restriction in copyright law. Copyright law gives a copyright owner an exclusive right "to distribute copies of [a] copyrighted work."iii This exclusive right is limited by the first sale doctrine, which provides that the owner of a particular copy "lawfully made under this title" is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy.iv

Meanwhile, the importation restriction under Section 602(a)(1) states that the importation of a copyrighted work acquired outside of the United States infringes the copyright owner's exclusive right to distribute copies under Section 106.v The tension in the law arises from whether the first sale limitation on the exclusive distribution right under Section 106 is applicable to the importation restriction of Section 602(a)(1).

The Supreme Court initially addressed this issue in Quality King Distributors v. L'anza Research Internationalvi. In Quality King, a beauty products manufacturer made products in the United States, but then sold the products to distributors abroad for resale outside the United States. The defendant purchased the items abroad, and imported the products back into the United States for sale.vii The plaintiff sued for copyright infringement based on the importation restriction of Section 602(a)(1), and the defendants claimed a defense based on the first sale doctrine. The court held that the first sale doctrine did apply when the imported goods were originally made in the United States. The opinion therefore, did not address the issue of when a product was manufactured abroad.

Several years later, in Costco Wholesale Corp. v. Omega,viii a foreign watch manufacturer sued Costco for importing, without permission, watches made outside the United States. The Supreme Court heard the case but deadlocked 4-4 after one of the justices recused herself. The decision technically affirmed the lower court decision, which held that the first sale doctrine did not apply because the goods were made and sold abroad.ix

The Majority Opinion
In Kirtsaeng, the Supreme Court squarely addressed the issue of whether the first sale doctrine applies to goods manufactured and sold abroad. Wiley, a book publisher, printed foreign editions of its textbooks abroad, and the books contained language making clear that the foreign copies were to be sold only in specific geographic regions outside of the United States.

Kirtsaeng, a citizen of Thailand studying in the United States, asked his friends and family in Thailand to buy copies of foreign edition English language textbooks, which he resold in the United States for a profit. The book publisher sued Kirtsaeng for importing and reselling the publisher's foreign-made books, and the student was found liable at trial.

The Supreme Court focused on whether the language "lawfully made under this title" in the statute restricted the scope of the first sale doctrine geographically. The book publisher argued, and the lower courts agreed, that the first sale doctrine had a geographical limitation, meaning that textbooks manufactured outside the United States were not made under the Copyright Act and were thus not subject to the first sale doctrine.

The Supreme Court disagreed and reversed the Second Circuit, finding no geographical limitation. Reviewing the plain language of the statute, past versions of the same provision, and the common law roots of the doctrine, the court found no support to restrict the first sale doctrine geographically.

Justice Breyer also highlighted that giving owners of works manufactured abroad the right to control the resale of works domestically would lead to "intolerable consequences" for the established practices of libraries, technology companies, retailers, and museums in the United States. If the first sale doctrine had a geographical limitation, there could be a threat of copyright infringement, for example, for the resale of foreign-made cars containing copyrighted automobile software. The Court held that these practical problems posed serious and extensive consequences.

Kirtsaeng could signal a change of direction for an analogous doctrine under patent law. Less than a week after releasing its Kirtsaeng decision, the Supreme Court refused to hear the appeal in Ninestar Technology v. ITC, where the issue presented was whether the initial authorized sale outside the United States of a patented item terminates all patent rights to that item;x the Federal Circuit had found that such a sale did not exhaust the patent owner's rights. Applying Kirtsaeng, other courts may in the future reach a contrary result, possibly setting up a circuit split and significantly affecting the rights of patent holders.

Copyright owners that make and sell goods outside the United States will have to reevaluate their pricing and marketing strategies in response to arbitrage by importers and resellers. In addition, copyright owners increasingly must rely on contract terms – a more limited tool – to protect their geographic markets.

The battle now shifts to Congress. Justice Kagan's concurring opinion suggests one possible legislative change: prohibiting unauthorized importation to keep markets segmented, but allowing sales in the United States to eliminate downstream liability. How proposals such as these will fare is uncertain given the already-crowded agenda in Congress regarding the Copyright Act, including legislative initiatives on orphan works, copyright small claims, and art resale royalties.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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